Aspen Insurance Holdings Ltd (AHL) 2016 Q1 法說會逐字稿

Welcome to the Aspen Insurance first-quarter 2016 earnings call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Mark Jones. Mr. Jones, please go ahead.

Thank you. Good morning, everyone.

On today's call, we have Chris O'Kane, Chief Executive Officer and Scott Kirk, Chief Financial Officer. Last night, we issued our press release announcing Aspen's financial results for first quarter of 2016. This press release as well as corresponding supplementary financial information and slide presentation can be found on our website at www.aspen.co. Today's presentation contains, and Aspen may make from time to time, written or oral forward-looking statements within the meaning under and pursuant to the Safe Harbor Provisions of US Federal Securities laws.

All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the risk factor section in Aspen's annual report on Form 10-K filed with the SEC and posted on our website.

Today's presentation also contains non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. For a detailed disclosure on non-GAAP financials please refer to the supplementary financial data and our earnings release posted on the Aspen website.

With that, I'll turn the call over to Chris O'Kane.

Thanks, Mark. Good morning, everyone.

Aspen has started the year well. Our results in the first quarter again demonstrate the benefits of our diversified platforms, as both the insurance and the reinsurance businesses delivered solid underwriting performance. We achieved annualized operating ROE of 11.2% and 4.8% growth in diluted book value per share. Aspen Insurance had a good quarter with gross written premiums up 5.5%, solid underwriting income, a combined ratio of 92% and an accident year ex-cat loss ratio of 57%.

The result was achieved in a rate environment that continues to pose a number of challenges, although the market -- although the impact from rates differs by land and geography. Overall rates in the US were down by 1%, while in international they were down 2%. However, within each of these geographies some areas were under continued pressures, while others were steady. International insurance lines, and more specifically those in the Lloyd's markets are generally experience more variation in pricing.

Professional and technology risk saw a 3% increase, while most lines were modestly negative. Lines such as crisis management and energy physical damage continued to be among the worst affected with rates down 14% and 13% respectively.

By contrast the US markets generally remained more disciplined with the majority of our business lines seeing rates flat or with small increases. However, there are areas in US such as property with rates down 7% that continue to face tough conditions.

In an environment like this, we remain selective and focus on the areas that we believe are the strongest and offer the opportunity for the most consistent returns. Our growth in insurance this quarter was well spread across our businesses with the exception of marine and energy where there were limited opportunities. I'm pleased to note that we're seeing positive results from targeted areas of growth. For example, we have reinvigorated our accident and health business and the results were seen in the premium growth this quarter.

While the initial focus was on the US and UK, it now encompasses businesses in Canada, Australia, South Africa and Singapore and was our first global business line launched early last year. Comprising mostly accident business, we're very pleased with the progress that A&H has been making so far. Our management liability business also saw very good results from transactions insurance such as reps and warranties.

In addition, P&C growth this quarter includes contributions from our European property joint venture which we launched last year with a focus on managing the complex property and business interruption risks of European-based global corporate clients.

Turning now to Aspen RE, Aspen RE delivered another very good quarter, including successful renewals in January and of quarter -- and after the quarter-end in April. We continue to demonstrate the strength of our relationships with clients and our abilities to find opportunities even in this challenging environment. We grew GWP by 7% compared to first quarter last year with rates down just 4% overall. Rates across all reinsurance were flat or down. Casualty was flat. Specialty was down 4%. Unsurprisingly, property cat rates were down 6%.

We continued the managed reduction of our property cat exposure and leveraged third-party capital through Aspen capital markets further reducing these exposures. Much of the growth in the quarter came from specialty reinsurance, which included for the first time AgriLogic, our new crop insurance business. We are delighted to work with our new colleagues and are very pleased with the progress that we've been making in integrating this business. AgriLogic is an important diversifying acquisition for us. We remain excited by the long-term potential of the combined businesses.

Both our reinsurance and insurance businesses are operating in an environment that provides plenty of competition, but also plenty of opportunities. We are seeing business and talented people being shaken free by changes in the industry and while we have benefited from this, we're being very selective in how we add business and people.

Now, I would like to turn it over to Scott for some comments on the financial results. Then I will make some further remarks. Scott?

Thank you, Chris. Good morning, everybody.

In the first quarter of 2016, we achieved operating earnings per diluted share of $1.29 and an annualized operating return on equity of 11.2%. Diluted book value per share was $48.22 at March 31, 2016, up 4.8% from December 31, 2015. The movement reflects the positive impact from earnings and the mark-to-market gains in both our fixed income and equity portfolios.

Gross written premiums to the group were $976 million, an increase of 6% compared with the first quarter last year. Our underwriting income was $56 million. The combined ratio of 92% included 3 percentage points of net cat losses in the first quarter. The accident year ex-cat loss ratio was 54.4%, largely in line with a year ago. Total reserve releases across the Company were $22 million. All three combined ratio points in the first quarter reflecting favorable prior-year development in both our reinsurance and insurance segments.

So let's look at the reinsurance results first. The year-over-year comparisons in the segment were impacted by negative foreign currency movements, which impacted our top line mostly and by the inclusion of AgriLogic in our results for the first time.

With regards to FX, this has been a more material item for reinsurance as we brought a higher portion of our European and other non-US dollar denominated business during the first quarter. With the US dollar continuing to strengthen particularly against euro and a number of other currencies incurring the Aussie dollar and the Canadian dollar as well as Sterling, this has negatively impacted gross written premium growth and net earned premiums in reinsurance in the quarter.

As Chris said, we made good progress integrating our crop business. We wrote $45 million of premium, of which we have earned very little and anticipate the bulk of this growth written premium to be recorded across the second and third quarters, while we largely earn that premium across the second half of the year. Relative to other lines in Aspen RE, our businesses like AgriLogic typically have higher loss ratios, but lower expense ratios.

Now with that background, reinsurance gross written premiums increased 7% to $518 million in the first quarter. Adjusting for the impact of AgriLogic and foreign exchange, reinsurance gross written premium was up 4%. The increase reflected continued growth in the existing specialty and casualty sub-segments.

Offsetting this was a decline in property cat reinsurance where we have reduced our exposures and chosen to see a greater portion of this business through Aspen capital markets compared to last year. We've also taken advantage of some certain favorable pricing in the market to purchase some additional retro cover.

Aspen RE delivered underwriting income of $42 million and a combined ratio of 85% in the first quarter. There were $11 million, or just under 4 percentage points of net cat losses due to weather-related events in the US and the earthquake in Taiwan. This compares to 3 percentage points from net cat losses in the prior year. We had $18 million, or 6.5 percentage points of favorable loss reserve development in reinsurance in the quarter, with releases predominantly in our short-tail lines. This compares to reserve releases of $13 million in the first quarter last year.

The accident year ex-cat loss ratio was 50.7% compared to 44.5% in the year-ago period. Approximately half of the increase reflected the inclusion of AgriLogic with the balance due to foreign exchange and of business mix. Adjusting for these items, the accident year ex-cat loss ratio was in line with the first quarter of last year.

Turning now to our insurance segment, which has seen some very good results this quarter, gross written premiums increased 6% to $458 million. Similar to recent quarters, we saw growth in property and casualty and financial and professional line sub-segments, which were up 6% and 28% respectively. However, this was partially offset by an 11% decrease in the property elements of our marine, aviation and energy sub-segments, where pricing pressure remains most acute.

The insurance segment recorded underwriting income of $31 million and a combined ratio of 92% compared to $22 million and 94% respectively last year. The current quarter reflects $8 million or 2 percentage points of net catastrophe losses related to weather events in the US. The accident year ex-cat loss ratio improved to 57% compared with 60.8% a year ago. The insurance segment had $3 million, or about 1 percentage point of prior-year favorable development in the first quarter compared to $14 million a year ago. Reserve releases in both quarters were mainly due to favorable development on our short-tail lines.

Turning now to expenses for the group, as we flagged on last quarter's call, the G&A ratio was slightly higher this quarter increasing to 18.1%. 70 basis points of the increase is attributable to the acquisition of AgriLogic; however, adjusting for this, the expense ratio was 17.4% and largely in line with a year ago. We still expect the full-year G&A ratio to be broadly in line with last year.

Looking at tax, you've probably noticed that our effective tax rate was lower this quarter at approximately 2%. This was due to the finalization in the quarter of an open tax position we had in the UK. However, looking ahead, we expect the effective tax rate for the year to be broadly in line with that of last year at approximate 4%.

I'll now move on to investments. Net investment income was $50 million in the first quarter, up 4% from the prior year. This increase is mainly due to the high dividends that we received on our equity securities. The equity portfolio is larger than a year ago. We received the largest dividend payout in the first quarter. So we should not expect this to be the run rate.

The total return on our aggregate investment portfolio was an impressive 2.08% in the quarter primarily reflecting gains in the fixed income portfolio and equities. The fixed income book yield was 2.56%, broadly in line with the 2.59% at the end of 2015, while the duration of the fixed income portfolio was 3.56 years including the swaps.

Now, I'll make a few comments about capital. We repurchased $25 million of ordinary shares in the first quarter of 2016 and have approximately $391 million remaining on our current share repurchase authorization. Additionally, earlier this week, our Board of Directors approved a 5% increase in the quarterly cash dividend to $0.22 per share.

We continue to actively manage our capital as efficiently as possible, taking into account a number of variables when deciding how best to allocate that capital. We'll continue to assess the variables as we work to balance the competing attractions of investing in business growth and returning capital to shareholders.

So to sum up, both businesses did well in what are challenging conditions in many markets. But we remain focused on maintaining our trajectory of profitable growth and building valuable for our shareholders over the long-term.

With that, Ill turn the call back to Chris.

Thanks, Scott.

This was a good start to the year with targeted growth and solid underwriting contributions from both insurance and reinsurance. Our first-quarter results yet again demonstrate the strength of the diversified business model we've been building for some time now.

Indeed the Aspen of today is quite different from the Aspen of five years ago. We expect to keep adapting to the changing environment and to look well ahead to ensure that we have the tools to remain relevant and agile in order to capture new opportunities.

The acquisition of AgriLogic was an example of this. We added a diversifying, but very complementary business with strong intellectual capital and good opportunities for profitable long-term growth. Aspen RE's strategy is to maximize opportunities in markets and regions with profitable growth potential.

A further example of this was the recent announcement by Aspen RE of the opening of an office in Dubai to serve as a hub for reinsurance business in the Middle East and Africa region. Emerging markets continue to offer significant but long-term potential. We need to be close to our clients wherever they may be to realize that potential.

At Aspen Insurance, we also look to enhance our business by identifying opportunities that position us for success in the long-term. As an example, on this same call last year, I talked about a couple of new growth initiatives. Our property joint venture to write major property risk for European multi-nationals and our decision to underwrite accident and health business on a global basis. Both of these were carefully targeted opportunities that were identified for profit and long-term growth. Both initiatives were significant contributors to growth this quarter.

We have talked about our global product line strategy; accident and health was the first business that we announced as part of this strategy, which we continue to execute, most recently with the announcement of a head of our global excess casualty business. We believe that our global products line strategy will drive targeted growth in profitability for the insurance business over the long-term.

We're also continuing to execute our target operating model. Already in 2016, we have established a global underwriting services team to free up reinsurance underwriters time for support tasks. We've implemented global procurement and space utilization policies. These are just a few examples of change that over time will result in business processes that are more robust, more cost-efficient and support additional business scale.

Before we turn the call over for questions, I have been asked by investors on several occasions recently about the potential impact on Aspen if the UK left the European Union in what is frequently called Brexit. The economic and political case for Brexit has not been made, so it seems to be highly unlikely that the UK will vote to leave in the forthcoming referendum.

However, if we are surprised by a vote to leave, we believe that impact on Aspen will not be material. I say this firstly as our premiums from the EU will lessen 7% of our total 2015 gross written premium.

Second, any decision by the UK to leave the EU will result in the UK government no doubt seeking to agree new trade agreements to protect its business interests. Thirdly, if the UK fails to recover its previous trading advantage in this exit process, we would have time to establish an alternative EU presence for one of our operating subsidiaries in order to protect our interests.

So that concludes our prepared remarks. We're now happy to take your questions.

(Operator Instructions)

Vinay Misquith, Sterne, Agee CRT.

The first question is on AgriLogic. I just wanted a clarification. You said most of the business will be written in the second and third quarters of this year, correct? When will they be on once again?

Vinay, it is Scott here.

So, let me just clarify that, obviously it is early days. But as we've gotten closer to the business and where were integrating it, we have a better view and a better understanding of particularly the distribution between the winter crop and the summer crop. As we've got into this, we know that there is a slightly higher distribution towards the summer crop.

Overall, our expectations have not changed, but what that does do is it means it brings a little more of that premium into second and third quarter. As a result obviously there's a slight knock on there which says that more of that earned premium will be earned in the second half of the year. But overall it's just purely timing and nothing more than that.

Sure. So the amount of premiums are about $185 million gross last year, correct?

That is correct. That is the best view of that we have at this point. We did say $185 million was the number that was written in 2015.

Okay. You plan to increase that or decrease that? Have you looked at the business? Do you plan to make some changes to that?

Vinay, it's pretty hard to give any detail on that at the moment. It is the first year that we've been in operation with this. But we bought this with the anticipation of growing that business. So we're hopeful that we'll see increases over time.

Sure. On split between the loss and the expense ratio, you said that loss ratio will go up but the expense ratio will go down. Do you have any policy acquisition costs associated with that business?

Actually, Vinay, the way we've structured some of the reinsurance arrangements at this point and under that existing structure there's not a significant component of acquisition costs. So what I'm doing is I'm talking about the expense ratio as a whole, which includes not only the acquisition but the operating expense ratios. So, I look at those together for this business.

Okay. So the $44 million of operating expense ratio for the reinsurance segment, should that come down over the next few quarters?

We would certainly hope so as we get a more volume of earned premium, which again is going to be structured towards the second half of the year. Yes.

Okay, great. Recently, we've had some earthquake losses worldwide. If you could help us to understand what exposure does Aspen have to that?

Vinay, I was expecting the question, but unfortunately I don't think there's much that sensibly we are going to say about this at this early stage. In Japan, these are a couple small events. They're well away from the industrial complex of Japan. They're well away from the area of Metropolitan Tokyo, where all of the oil and gas which exists which would be very dangerous. There some manufacturing that goes on there. There's some possibility of business interruption exposure, though actually in Japan business interruption is not much sold. But it can't be ruled out.

I have not seen any reliable estimate of market loss. I have seen, like you, some estimates. I think the truth is until the non-life association of Japan pronounces, until some of the companies actually do some loss adjusting, no one's going to know what to expect. But that said, I'm not expecting anything in terms of material market loss for the Japanese market from this. As a reinsurer of Japan, most of our exposures are on an in-excess basis or they're exposures for where the industrial risks are. So I'm anticipating that will be lightly affected if at all by either of those events.

I think in Ecuador the position is even more remote. We really do not have much business in that part of the world. The event itself appears to be quite a bit smaller in economic and insured impact than Tokyo. Slight to negligible is what we are guessing, although it's early days.

I don't know if you wanted to mention floods in Texas, which I saw some people affected by the other day. But that's -- I think that's really for the primary writers who are big in Texas. That is not us. We don't have reinsurance clients in the smaller Texan companies. They're just really not in our portfolio. So we don't expect to get it by the regional reinsurance count. We don't expect that the major clients -- the major nationwide companies that we like to underwrite, we'd attach far in excess of the Texas law. So again, we don't expect much there.

On the insurance side, you can't rule out a few isolated incidents of loss, though we're not really aware of very much in that yet. But again, my general sense is that we shouldn't be too troubled by what's been a busy period for cat losses.

Okay. That is great. Thank you.

Thank you very much, Vinay.

Dan Farrell, Piper Jaffray.

I was wondering if you could you talk a little about capital management strategy as we go through the year? Just thinking about how you're approaching buyback versus the other investments you're making in the business? The buyback this quarter was a little lower than earnings power, so I'm just wondering how you're weighing those trade-offs?

Yes, Dan, it's Scott here. We did buyback $25 million of shares in the quarter. So that's a decent start. I would say that we definitely have a proven track record of returning excess capital to shareholders. There is no change in that approach or methodology at all. Clearly, it can go up and down in various quarters.

But it's very much a balancing act between the demands and opportunities that we see in the business. But clearly, we're wide-eyed up against the value that we can create through buybacks. It's going to depend on prevailing share price, interest rate and all the usual considerations. But all I can say is it's going to depend. But clearly it's at the forefront of our mind.

Okay, great. Thanks. Then just in the reinsurance segment, it looks like there was a little more CD premium or some retro purchase. Is that correct? Or is there anything with AgriLogic in there this quarter? I just -- wasn't sure if there was actually the true purchase of retro.

Yes. Dan, there is a couple of things going on. We talked about a little bit of an increase usage of our Aspen capital markets vehicle. We did also take advantage of some favorable pricing to purchase a little more cat retro. So there is a little bit of that. None of these things are individually very large but in combination, there are a couple things. There is a little bit on AgriLogic as well on the written side. But not much of that flying through on an earned at this point.

Okay. Great.

Then how are we thinking about the trend and acquisition costs? There's obviously a lot of mix change going on that might be impacting acquisition ratios? Are we -- what we're seeing this quarter is this a reasonable trend to be thinking about? Or should we be thinking about the mix changes having any impact at all.

Yes. Dan, it can always be a little bit lumpy in quarters. But it's off a little bit from this time last year. It's hard to say at this point, a little bit of a trend downwards. I think you're right, it is going to vary, very much depending on the mix. I can't say too much more about that at this point though.

Okay. All right. Thank you very much.

Thanks, Dan.

(Operator Instructions)

Brian Meredith, UBS.

A quick question here -- a couple questions. Chris, obviously two big large companies have been scaling back doing some re-underwriting. Number one, are you seeing any opportunities at Aspen as a result of that? Number two, is it having any impact on any areas of the marketplace that you can see right now as far as pricing?

Okay, well good morning, Brian. Thanks for the question. It's an interesting question.

First of all, I want to remind you that late last year, we announced something of a restructuring of our insurance operations with the creation of 13 global product lines, as well as a new focus on the US regional business and the international, but particularly the UK regional business. We hired quite a lot of people to help us do that.

We've mentioned David Cohen on these calls before working for Mario. He's the present CEO of Insurance. But we hired some really terrific people to lead areas such as cyber risk, such as energy, such as marine, such as excess casualty. I've got to stop but I hope I don't offend anybody if I didn't actually name them on the business. We've appointed nine. We may point up to another four as time goes by. Those people I think equip us very well to take advantage of some of, let's say, the people -- the human capital disruption in the market.

We've hired those people. And by the way, I think the total hired now is in the region of 50, which for the size of our insurance operation is a substantial significant change. We're seeing a lot of excitement. We're getting new insights. Some of these new guys, the GoPro users, I think, have excellent management capabilities. To be successful, I think you want to be good at underwriting, but the discipline of management is another advantage that they bring and they bring it more even than we had it before within our insurance operations, which is good.

The kind of -- the human capital end of things with a couple of major companies repositioning, I think we're already placed to take advantage of. We have and we are interviewing one or two more people from some of those sources, but I think the bulk of the hiring is done.

Clearly, the areas of business that some of those companies engage in that I think have done well over time have been very successful. Done badly, done less well they may not be successful. I think the opportunity to cherry-pick some of that is now available and that our new bud of leaders are absolutely allowed to wear-off and taking steps to benefit from.

It's too early to give you a premium impact of these changes, we don't know that ourselves, we don't know where it's going to go. But the flow of business is better and the difficulty of saying -- it's always tough to say, we're not going to be cheaper than your current carrier. But we're going to be a better deal for your clients, you should try and come to us. But now you can say it, because people are losing faith in the current carrier. That is good.

The last bit of your question was, so are we seeing any uptick in pricing? I'm sorry about this, but the answer, Brian, no, we're not. It's just not there yet. I think logically it ought to come. It maybe a little bit early days, but at the moment I think those risks are in general being dislodged and moved at comparable pricing to before.

So I think what you have to do is not say we can reprice this whole book of business. We want to take a lot of it. I think as I said already you need to cherry-pick and choose those risks, which actually you would write at the prevailing pricing and avoid those ones that look a bit cheap.

Got you. I'm just curious, you said you've hired 50 people. But how do you think of return on investment? How long it takes for somebody that you've hired to start really producing?

Well -- in hiring those people clearly, you're adding a bit more costs. We've opened one more office as a consequence. That's a little bit of cost. On the other hand, there were some people who we exited as a consequence of this, so after some severance costs, which are modest, the cost base comes down. Then as this process works through, a vast majority of our people have got it and they're with the program. They're excited about it.

There are one or two, who have also continued to leave. So the net cost impacted it as much as 50 heads would suggest. Our analysis showed it was pretty much neutral in 2016, accretive in 2017, and highly accretive in 2018. It's a big upgrade of our underwriting talent of our profile and our potential to simulate the flow of business. So, as we haven't actually given out numbers and what we think the new teams are going to do in premium terms. I think it's probably better to do that when they've done it. We'll tell you what has happened rather than give you a prediction of what might happen.

It's always the case, I think Scott that had it in a question, when you're looking at capital and how you're going to put it to work. You've got to look at the share buyback option. You've got to look at the growth option. You've got to look at the acquisition option. We're very rigorous on that. I think what's interesting these last, say, 12 months is we have found ways that we might not of anticipated two or three years ago to put our capital to work in ways that we believe are much more value creating for our shareholders than would be buying back our shares.

Great. Then last question for you.

Can you look in your crystal ball and give us some thoughts on what you think Florida renewals could look like?

Yes. These questions, Brian, these get me shot by the property cat underwriters. (laughter) If I tell you what I think, it's not what they want their CEO to be saying. I think that probably in a sense is your answer.

Yes. There's -- it looks like maybe a little bit less buying demand from Florida. The appetite to write this business -- it's not as strong as it was a year or two ago, but it's still pretty strong. So, I think the supply/demand equation suggests a little bit more rate erosion. I don't think it's going to be double-digits. But that would be surprising.

It might be single, but Florida -- if you look over three years, pricing in Florida is down 30%, in some cases it's more than that. Our view is probably the premium is just slightly a little above the cost of claims you can expect now, but only just. That is not the kind of reward that you want for putting your capital at risk in a place like Florida. So for us, it's -- I wouldn't be surprised if we come out of this season doing a little bit less Florida than we had when we went into it.

Okay. Great. Thank you.

Brian, thank you very much.

Thank you. As there are no more questions at the present time, I would like to return the call to Chris O'Kane for any closing comments.

Thank you all for listening this morning. Thanks for those questions. Have a good day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.